FxVol Weekly
03 - June - 2022
Momentum divergence when seen on a daily chart is usually a good indication of trend exhaustion. The example above is a good example of this indicator not working out in this example. In fact, this pattern is seen in all of the JPY crosses, CADJPY, GBPJPY and EURJPY. We now have no indication of an end to the JPY weakness but one conclusion we would make is not to fade this trend unless there is sufficient technical evidence to reinstate the trade.
The short term momentum chart shows a similar pattern and here we would advise not to fade the trend. The macro backdrop to the persistent yen weakness has persisted with rising oil prices and US yields that tried and failed to rally sufficiently to reverse the JPY downtrend. Our discretionary view is that this will come to an end and likely in a dramatic reversal but that may well be later than we anticipated in the year.
While not as dramatic as CADJPY it shows a similar pattern.
Two-week and one month CAD implied vols have sold off too far and are now cheap in relation to the actuals. 1Mos CAD strangles look like a good bet.
CAD momentum turns sharply negative suggesting a retest of the previous lows. With commodity prices likely to remain, volatile CAD, gamma is likely to prove valuable.
EURCAD implied vols remain well under the actuals.
Dispersion in the example above is only demonstrating the temporary exhaustion of the trend and the move up in the short-term dispersion indicator strongly suggests the end of that consolidation period. This is another reason not to try to fade this move.
Another reason why three-month EURCAD implied vols may well be bottoming is the early signs that hourly dispersion is low and showing signs of bottoming.
The chart above is a three-month GBPUSD implied plotted against a three-month GBPCAD implied vol.
GBPCAD looks set to make fresh lows. Another indication that the market is assuming to high a degree of positive correlation between CAD and GBP.
CAD risk reversal is losing their premium for CAD puts with the one-month falling fastest. Selling off the risk reversal is in line with the decline in CAD implied vols.
The market looks to have sold off the one-month CAD implied vol too far too fast and we see the one month as attractive on an active delta hedging basis.
We remain sceptical of the theme of ongoing JPY weakness but we have to respect the signals we are getting from the technicals. Our indicators do not always work we admit, but they do provide you with a statistical edge and that is what counts at the end of the day.
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Research Director
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